Sometimes getting a loan is as easy as filling out an application. But as dollar amounts increase or the situation gets more complicated, lenders may want reassurance. They could even ask you to explain why your loan is a good idea.
If your bank wants more than the basic information that goes on an application, a letter to the bank could be in order. Some banks specifically request letters, while others might appreciate any extra steps you take to try and win the loan.
Learn how a loan letter can improve your application and what you should include in one.
Why Write a Letter to Your Bank?
When you write a loan letter to accompany your application, you have the chance to explain exactly why the lender should approve your request. It gives you an opportunity to:
- Add commentary on topics that do not appear in a standard application
- Explain your financial situation thoroughly
- Lay out your plan for using and repaying the loan
- Address any weak spots in your application or finances
Loan letters can be particularly beneficial for small businesses, which often need capital to grow but may not meet the strict requirements laid out by bank loan applications.
Like a cover letter for a job application, a loan letter is your chance to make your case on your terms.
Loan Letter for a Mortgage Application
If you are applying for a mortgage and your application has some weak spots or unexplained elements, writing a loan letter can increase your chances of approval or of receiving a lower interest rate.
You may need to write a letter to accompany your mortgage application if you have:
- Multiple names on your credit report
- Negative entries in your credit report
- Gaps in employment
- Atypical sources of incomes, such as a small business or freelance work
- A recent change in jobs
- Unusual activity in your bank account
- Former delinquencies or bankruptcies
A loan letter gives you a chance to explain these things and address any concerns they may create for the bank.
Parts of a Loan Letter to a Bank
When writing a letter to accompany your loan application, you need to both keep things brief and provide sufficient detail to make a convincing argument.
Even while keeping things concise, however, there is still specific information you will want to include.
Who and What
Tell the bank a little bit about yourself. If you're applying for a business loan, be sure to include information about the whole team, including the number of employees and how long you've been in business.
Highlight any strengths, designations, or credentials you've earned, as well as successes in your past. Don't go overboard: just pick just a few of the most impressive and relevant things that come to mind.
Lay out the specific amount that you are requesting for your loan. But sure to include the timeframe, such as $100,000 to be repaid over five years.
Explain exactly how you will use the funds. Your lender needs to know that the money will be put to good use.
For example, if you have been turning away business because you didn't previously have capacity, let your lender know about this unmet demand and your ability to satisfy it.
Demonstrate that you have done some market research and know how the loan will impact your business or personal finances.
Your lender needs to know how you’ll fund the repayment. Will you repay a personal loan from your salary or a business loan from increased revenues?
Be specific about how and why your earnings will increase as a result of the loan.
Your lender will notice if you have bad credit or insufficient income to repay the loan. When you address those issues directly, you signal that you're a serious borrower who understands what's at stake.
Sample Outline for a Loan Letter
Be polite and formal in your language, addressing your letter to the loan officer or specialist that you are working with and ending with "Sincerely" or "Regards." Be sure to include your full legal name, address, and contact information.
Like a cover letter for a resumé, aim to keep your loan letter no longer than one page.
Sample for a Small Business Loan Letter
- Overview: “ACME Enterprises specializes in… and has been in business since 2007...”
- Reason: “I’m writing to request a loan for $100,000…”
- Professional information: “ACME Enterprises was founded by Jane Doe, who has over 10 years of industry experience. The marketing team is led by John Jones, who previously helped grow XYZ Corporation…”
- How funds will be used: “Our goal is to increase the number of daily service visits by purchasing an additional vehicle and related equipment. The total cost of these investments is…”
- Benefit: “Currently we are unable to respond to 30% of requests for service, which results in customers calling our competitors or switching products. We will be able to profitably respond to all of those calls with the additional equipment…”
- Basic financial information: “ACME Enterprises currently operates at a profit. Revenue from the previous year was $X, and net income was $Y…”
- Concerns: Anything else that shows you’ve done your homework and deserve the loan.
- Closing: “Please see the enclosed business plan, and feel free to contact me with any questions you have at…”
You will also need to submit a business plan with your loan application. Think of your introductory letter as an abbreviated version of the business plan.
Sample for a Mortgage Loan Letter
- Personal information: “My spouse and I have recently submitted a mortgage application at XYZ Bank, our full names and contact information are...”
- Basic financial information: “You will see in our application that our joint income for the last ten years has ranged from $X to $Y..."
- Concerns: “I’m writing to explain my irregular income and why this will not impact my ability to repay the mortgage I have applied for…”
- Explanation: "Since 2011, I have been self-employed. My business is ABC Enterprises, which provides freelance ABC services for clients such as... My business has made an annual income of no less than $XX for the last ten years, out of which my personal salary has increased from $X to $Y. In the enclosed business plan, you will see that due to These Market Factors I expect demand to continue increasing as I expand my services..."
- Closing: “Thank you for your time and attention, and feel free to contact me with any questions you have at…”
The lending decision ultimately depends on the financials, such as your credit scores, income, collateral, and ability to repay the amount you borrow. But a loan letter can improve your chances by explaining your situation and the impact the loan will have on those factors.